Getting Customers to Say, 'The Price Is Right!'

Getting customers to say, ‘The price is right!’

In a world where too many companies still believe that ‘if we build it they will come,’ practitioners of semiconductor sales know otherwise. This article lays out the elements essential to extracting the most value for current products by effectively communicating the true value of those products to customers.

Gaurav Batra and Keeping the marketing and sales engines humming larger issue underlying habitual discounting Olivia Nottebohm profitably is a cornerstone of all successful compa- in semiconductors is the acceptance on the part of nies. It is especially important in the semiconductor semiconductor companies that a dynamic built industry, where the leaders in each product seg- into the industry as a whole will always drive prices ment usually take most of the profits. Things often down. Companies therefore often fail to address go wrong when companies feel their market and can even contribute to the shortfall by expect- share is threatened. Frequently, the first response of ing nothing better. However, companies can both leading and lagging players is to discount begin to reverse this trend by revisiting the value prices. Closer analysis, however, often reveals that proposition they are offering to customers, this move needlessly dilutes value that could specifically to determine whether the true, unique have been retained despite competitive pressure. value of their products is being communicated. This is where the journey to value selling begins. In semiconductors, discounting is not just a strategy but an industry norm—a condition that The value-selling approach has prevailed owing to an industry adaptation We have devoted considerable research and drawn to extremely tight innovation cycles. That is, the upon extensive engagement experience to create 16 McKinsey on Semiconductors Autumn 2011

an approach to sales by which companies can The transition to a value-based selling approach better understand their existing value propositions, involves a fundamental change in existing identify where these are failing them, and make sales approaches and marketing messages. The the transition to a customer-centric approach that constituent tactical shifts of the approach immediately demonstrates the full value of are made based on deep-structure interviews with their products to customers. A value-selling customers, as well as by working to identify approach allows companies to pursue and capture the value of the company’s offerings. A company margin according to the end-to-end value provided adopting this approach will also need to to the customer, as opposed to the traditional construct a set of new tools for the sales force and cost-plus approach. Even in the semiconductor build value-selling capabilities in the workforce. industry—with its engineering culture that Last, it must develop metrics to track sales-force is particularly comfortable with cost-plus pricing— performance over time. A formal transformation most client executives have been pleasantly program is necessary to sustain the transition; the surprised to see the top-line impact possible from good news is that the scope can be either value selling, especially as it requires no changes narrow or broad, focusing on a single product family to the existing product portfolio. In the first year, or region, or encompassing a program that value selling can add 2 to 4 percent to average repositions a company’s entire product portfolio. selling prices, a number that can grow to 6 to 8 percent in the second year if customer Identifying value to the customer insights are fed back into the design of Value selling requires, at its base, an under- new products. standing of the true value of the product to the customer. Most customers think of value as Our original findings were based on practical apparent value—that is, the benefit they receive experience. We interviewed dozens of one directly from a purchase. They rarely consider company’s end customers, asking each of them to indirect benefits, such as the positive or negative allocate 100 points among the different factors impact of switching costs, or the infrastructure in their process for making purchasing decisions. savings that come from sticking to current product The great majority of those surveyed identified lines. In addition, a mind-set has been observed price as the most important factor in their final in both companies and their customers by which decision. Deeper analysis of those responses current prices are expected wholly to deter- revealed, however, that some groups of customers mine future prices. Accordingly, unless the product actually cared as much or more about features changes, the price should rise only in line than about price. It turned out that some customers with inflation or if particular input costs increase. were knowingly paying more for the client’s This generally leads companies to neglect the product than they would have for the next-best question of how the value of their products evolves alternative. The discovery of this partly over time. hidden preferential-buying behavior led to a conclusion that a sales approach that In all, there are four components to implementing communicates a holistic view of value could a value-selling approach: developing a new positively affect the way that customers approach to purchasing criteria, building a new set think about purchases. of tools to support the sales teams in the field, Getting customers to say, ‘The price is right!’ 17

developing training to educate sales teams on the • Ease of use and ability to design in, without new sales approach, and developing metrics many additional modifications and systems to track the sales force’s performance over time. • Advantaged size and packaging to enable greater bill-of-materials integration 1. Uncovering customer purchasing criteria The first step in the new direction is a diagnostic • A better set of built-in capabilities to reduce analysis aimed at uncovering the key criteria the need for additional discrete peripherals, that customers use to make purchasing decisions. board design, or programming This may seem counterintuitive, as company sales and marketing teams would be expected to At the company level, we have found that cus- know these criteria already. Typically, top tomers derive value from the following elements: salespeople do know exactly what matters to their customers, but their less skilled • The reputation of the provider—for example, colleagues may not; best practices are not the value of saying “powered by x” or always shared or institutionalized in “includes y processor” a form that is useful to less experienced account managers. We begin with interviews to • Strong development and technical- determine the elements that matter most to support capabilities customers and to understand how these are prioritized. The exercise is highly qualitative, • Advantaged supply-chain and manufacturing requiring dozens of interviews throughout capabilities, resulting in higher product the customer base. availability, better quality assurance, and superior reliability The diagnostic yields three results: a list of factors that are most important to customers, a • Developer tools and well-established ranking of those factors in order of importance, code libraries—for instance, a network of and, critically, an assessment of company independent software vendors (ISVs) performance against those value drivers in any for microprocessors particular product category. In a value-selling pilot, one customer said, “If it To go beyond articulated preferences, we saves me development cost and improves my conduct a conjoint analysis to quantify value time to market by x percent, I am not going to go drivers at both the individual product for a cheaper device.” This remark neatly level and the broader company level. Typical sums up the reasoning behind value selling and findings from diagnostics of the sources the source of its impact. of value at the product level have included these attributes: 2. The value-selling tool: Communicating quantifiable value to your customer • Superior performance with regard to power Once a company understands the real value of efficiency, speed, graphic resolution, and so on its products to its customers, it must develop 18 McKinsey on Semiconductors Autumn 2011

easy-to-use tools to guide the sales team in its The team therefore needs an analytic tool work. The tools are often mechanisms for that can systematically identify the value created quantifying the impact of relevant value drivers for the customer by the company’s product and simplifying any calculations the sales versus the next-best alternative. This identifica- team must make. If we consider the example of a tion will come in the form of an assessment company that can deliver a particular product that clearly captures the incremental value faster than a competitor, its sales force must be delivered by the product vis-à-vis competitor able to quantify the value to the client of offerings (Exhibit 1). The tool must be easy MoSCfaster 2 time011 to market in the specific marketplace to use, and its analytic mechanism dynamically Salesinto whichand marketing the product is being sold. A calcu- responsive to the needs of the field. The Exhibitlation of3 suchof 4 specificity can rarely be performed salesperson must be able to enter a few essential in an ad hoc manner by a sales team in the field. variables reflecting the specific interest of any

Exhibit 1 Research shows that customers make clear value distinctions for many products.

Client product value Next-best alternative (NBA)

End device Product value vs NBA, $ Value/NBA

7.55 3.6x Product 1 2.10

7.52 2.6x Product 2 2.90

Product 3 0.90 1.8x 0.50

13.00 1.7x Product 4 7.50

4.10 1.2x Product 5 3.50

Product 6 6.80 1.1x 6.20

9.00 1.0x Product 7 9.00

2.00 1.0x Product 8 2.00 Wide range in value over NBA price

Source: Customer interviews; McKinsey analysis Getting customers to say, ‘The price is right!’ 19

MoSC 2011 Sales and marketing Exhibit 4 of 4

Exhibit 2 What customers value differs signiﬁcantly according to the segment they fall into.

C “Hawk” Values 2 of 3 attributes; primary Dynamic concern is performance over costs; willing to pay a lot of money D “Eagle” A “Sparrow” Pushes Cannot the limits— End-user beneﬁt from demands characteristics bulk of maximum what product performance can offer on all B “Crow” metrics Values only 1 of 3 attributes Static but willing to pay a premium for that value

Design Low High Low High intensity

Functionality Low High of chip

given customer and obtain an assessment of the officer in order to make the winning case for value of the product to that customer. their product to his or her boss. The salesperson thus delivers to the customer a transformed Much technical and experiential expertise will value proposition. The message becomes “I’m be incorporated into the value-selling tool, getting a product worth two to three times and this input must be regularly updated with its price,” rather than “I’m getting a product product, customer, and market data. The 10 cents cheaper than the next guy is.” tool’s purpose, however, is a simple and visible demonstration of the power of the value- Not all customers are the same: some may share selling approach. This power lies in value a consistent set of value drivers, while others selling’s ability to communicate a quantifiable have variable priorities or find different value in value, based on the drivers that are most comparable attributes. Good value-selling important and therefore worth the most to the tools empower salespeople to identify the types customer relative to competitive offerings. of customers they are dealing with and The approach is entirely oriented to allowing the to generate quickly the most convincing value salesperson to take a customer-centric view. proposition for them. The sales force can It enables salespeople to provide in a dynamic adapt to different types of customers without fashion the information needed by a customer’s having to improvise value propositions for line-of-business leader or procurement each customer visit (Exhibit 2). 20 McKinsey on Semiconductors Autumn 2011

3. Building value-selling capabilities in inspiration from above. The head of sales the sales force for the company must participate in the effort The value-selling approach represents a and personally emphasize the need for new way for the field sales force to relate to its value selling. customers. How can you bring this new approach to life for them? Here we believe there Practicing the approach are three critical success factors: first, leaders Finally, we have found that it is crucial to create and the sales force must co-create the solutions; a low-stress environment, in which sales- second, leadership must visibly model the people can practice free of exposure to customers new approach; and third, salespeople should be and fears of internal evaluation. Every time allowed to practice new skills in a safe, non- we have conducted such sessions, we have customer-facing environment. discovered that recording the salesperson’s customer approach and then reviewing it with Co-creating solutions them helps prepare them for even the toughest The more the experienced members of the sales customers. When they see themselves force are engaged in the quantification process— working—and improving—in the new way, sales- that is, in generating the underlying numbers people truly internalize the arguments they that drive the calculations made by the tools the must make and embrace the value quantifications sales force will use—the more effective they will put forward. the result. There are two reasons for this: first, experienced salespeople understand the Early practice often becomes a learning oppor- dynamics in the marketplace and can use their tunity, in which the shortcomings of the existing expertise to improve the tool, and second, approach are revealed and understood as such. they must believe in the calculations that drive Salespeople usually begin by talking in cost-plus the value-selling tools they are being asked language, rather than adopting a customer to use. perspective. A salesperson may fail to offer quan- tified comparisons with competitive products, Modeling the approach even when supporting data are at the ready. The The second success factor is no less important key is to keep trying: with practice, the new than the first. The sales force must feel the way of working begins to stick.

Value selling requires, at its base, an understanding of the true value of the product to the customer Getting customers to say, ‘The price is right!’ 21

4. Locking in change by tracking performance McKinsey has introduced its value-selling We cannot overstate the importance of metrics approach in a number of industries, where it is to track performance. Simply put, what gets increasingly becoming a key success factor. measured gets done. Most successful transfor- We strongly believe that this approach has a great mation programs have an engaged program- deal to offer the semiconductor industry, where management office that is aided by efficient IT customers want to be told precisely what value is systems to track progress and assess sales- being created for them and to know how a force behavior on a regular basis. The most product will help them be more successful. In a successful value sellers use a sequence world where products do not sell themselves, of workshops, scheduled to coincide with the value selling is demonstrating that it can make the run-up to new sales campaigns or new crucial difference for companies. product launches, to maintain momentum. These sessions allow companies to share best practices and celebrate successes. In the medium term, value selling can improve average selling prices substantially, reinforcing the approach.